AT&T looks to future with DirecTV deal

A DirecTV technician carries a new satellite TV dish while performing a new installation this month for a tenant at a apartment building in Lynwood, California. Bloomberg photo

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(AP) — Priming itself for the age of Internet-delivered video, AT&T Inc. said it would buy DirecTV for $48.5 billion in cash and stock.

While DirecTV doesn't help the telecom company compete immediately in online video, cost savings from the merger and the extra cash flow will improve its ability to compete with the cable giant that would be formed by Comcast Corp.'s proposed $45 billion takeover of Time Warner Cable.

With 5.7 million U-verse TV customers and 20.3 million DirecTV customers in the U.S., the combined AT&T-DirecTV would serve 26 million. That would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million under a $45 billion merger proposed in February.

The deal is also the third-largest for the communications industry in the past year, ranking after Verizon Communication Inc.'s $130 billion deal for the rest of its U.S. wireless venture and the pending $68 billion purchase of Time Warner Cable, Bloomberg data show.

AT&T is already the largest mobile service provider in the U.S., serving 116 million customers compared to Verizon's 103 million.

'PIECES TO FULFILL A VISION'

"What it does is it gives us the pieces to fulfill a vision we've had for a couple of years — the ability to take premium content and deliver it across multiple points: your smartphone, tablet, television or laptop," AT&T's Chairman and CEO Randall Stephenson said on a conference call with journalists yesterday.

"Strategically, this makes a lot of sense for AT&T," said Jan Dawson, an analyst with Jackdaw Research in Provo, Utah. Gaining a satellite-TV provider "lets them go national with a video offering that matches their wireless reach."

The companies promised consumer benefits like more economical bundles that tie mobile phone, pay TV and Internet service together on a single bill.

But the deal could face unique regulatory scrutiny from the Federal Communications Commission and Department of Justice. Unlike the cable company tie-up, the AT&T-DirecTV merger would effectively cut the number of video providers from four to three for about 25 percent of U.S. households.

Cable companies operate in regions that don't overlap, but in comparison, AT&T provides TV service to 22 states, where it is a direct competitor to DirecTV, which is nationwide. Reducing choice in those markets could result in higher prices for consumers and that usually gives regulators cause for concern.

COMMITMENTS

Stephenson said those concerns would be addressed with a number of what he called "unprecedented" commitments. Among them:

— DirecTV would continue to be offered as a standalone service for three years after the deal's closing.

— AT&T would offer standalone broadband service for at least three years after closing, so consumers could consume video from Netflix and other online services, with download speeds of at least 6 megabits per second where feasible.

— AT&T vowed to abide by the open Internet order from 2010 that the Federal Communications Commission is now in the process of revising after a court struck it down.

"This is going to prove to be a pro-competitive and pro-consumer transaction," Stephenson said.

'LOUSY SERVICE AND PRICE HIKES'

Several consumer groups disagree. Delara Derakhshani, policy counsel for Consumer Reports magazine's lobbying arm, Consumers Union, said the deal "is just the latest attempt at consolidation in a marketplace where consumers are already saddled with lousy service and price hikes."

"The captains of our communications industry have clearly run out of ideas," Craig Aaron, CEO of advocacy group Free Press, said in a statement. "Instead of innovating and investing in their networks, companies like AT&T and Comcast are simply buying up the competition. These takeovers are expensive, and consumers end up footing the bill for merger mania."

Stephenson and DirecTV CEO Michael White both said the merger would allow the combined company to offer video over multiple screens, but acknowledged that deals with content providers to expand service on multiple platforms still need to be negotiated.

White said that, for example, DirecTV's exclusive deal for its signature product, NFL Sunday Ticket, expires at the end of the coming season. He said he was "confident" the deal would be extended with the NFL on an exclusive, long-term basis, and noted that in the past, DirecTV has sold the football package directly to online platforms, such as to users of Sony's PlayStation.

"This positions us well to compete in the 21st century," White said. "I think our future is bright together in ways that make both of our companies stronger."

BENEFITS QUESTIONED

Analysts have questioned the strategic benefits of a deal, particularly because it would give AT&T a larger presence in the mature market for pay TV.

Last year, pay TV subscribers in the U.S. fell for the first time, dipping 0.1 percent to 94.6 million, according to Leichtman Research Group.

While AT&T and DirecTV are doing better than cable companies at attracting TV subscribers, DirecTV's growth in the U.S. has stalled while AT&T is growing the fastest of any TV provider.

DirecTV offers neither fixed-line or mobile Internet service, and its rights to airwave frequencies for satellite TV are not the kind that AT&T can use to improve its mobile phone network.

Still, Stephenson has talked exuberantly about how the growth of online video helps boost demand for its Internet and mobile services. Last month, AT&T entered a joint venture with the Chernin Group to invest in online video services.

AT&T and DirecTV expect the deal to close within 12 months. Under the terms announced yesterday, DirecTV shareholders will receive $28.50 per share in cash and $66.50 per share in AT&T stock. The total transaction value is $67.1 billion, including DirecTV's net debt.